Greg Krehbiel
Has “classic economic theory” failed?
by Greg Krehbiel on 4 November 2009
Four Reasons Why Hyperinflation Hasn’t Hit the U.S. Economy … Yet
I don’t pretend to understand this stuff, but it’s interesting.
Everything we know about classic economic theory suggests the U.S. economy should be experiencing Zimbabwe-like hyperinflation right now, thanks to the nearly $2.2 trillion the U.S. Federal Reserve has pumped into the system.
My theory — which is probably nonsense — is that we’re not experiencing inflation because (give the national debt) it would bankrupt the government, so the government is pulling whatever strings are necessary to prevent it.
The problem with that theory is that it assumes the government is competent to do such a thing, and I’m not sure if that’s true.
2009-11-04 » Greg Krehbiel
4 November 2009 @ 11:03 am
Yeah, I think the chances of the government successfully staving off inflation are pretty grim.
I think it probably has more to do with the fact that, as a wealthy nation, we have a greater capacity to refuse to buy. IOW, you can be frugal when it comes to things that don’t keep you fed and housed.
4 November 2009 @ 11:40 am
Non-Keynesian economic theory has failed. If that’s what you mean by “classical,” then yes.
There is little danger of inflation in a jobless recovery. We don’t have what it takes for stagflation, and workers still aren’t making any money. If stimulus puts people to work, and the workers are actually paid what their labor is worth, then we might get some inflation.
I firmly believe that fear of inflation is behind much of the mismanagement of the economy beginning in the 80s.
4 November 2009 @ 11:50 am
Well considering the misery index during the previous administration, you gotta be able to understand that fear, eh?
4 November 2009 @ 12:51 pm
John,
How do we determine if workers are paid what they are worth? Markets or Bureaucrats? If the second, why don’t we just set minimum wage at $100/hr and the middle class will have an unbelievable resurgence. Be great stimulus, too!
4 November 2009 @ 12:59 pm
Collective bargaining allows workers to negotiate fair wage packages without the “Take it or leave it” attitude that monolithic employers create.
For instance, at Harvard University, the University wanted to pay their maintenance workers more, both because of the value of the work they did and to retain good workers. They were strongly discouraged in doing so by other employers in the area for fear that they would force others to pay a fair wage too. Most employers are so focused on keeping wages down, they actually encourage high turnover rates even when it cost them.
As long as employers can say “Don’t like it? go to WalMart” wages will be lower than they should be. As long as employers value the person, not the work they do, we will have low wages for those who do the work, and ridiculous bonuses for executives who actually hurt the company
4 November 2009 @ 1:01 pm
And Deb, misery in the previous administration was caused by low wages, not by inflation. Inflation has been, IMHO, too low for 30 years.
I don’t want hyperinflation, but I would like to see, say, 4% for a while.
4 November 2009 @ 1:10 pm
I don’t get the “value the person” thing – soory having a dense day…
Are we talking about the same time period? I am POSITIVE that you remember the 21% interest rates and, I think, 14% inflation of the Carter era.
5 November 2009 @ 2:54 am
Greg – let me guide you. There are two things the government is highly competent with: writing bad laws, and knowing how to borrow money so that they can spend wrecklessly.
Hyperinflation has not occurred because we’ve continued to convince the Chinese to purchase our debt. Again, the U.S. is infinitely competent at that game. However, even the Chinese have their limits. This is why we are likely in the calm before the storm. The two evils the government is so good at, will soon implode unless we vote human beings into office soon (Dems are trees, Republicans are bullets).
5 November 2009 @ 7:20 am
John,
Since you’ve switched to the phrase “fair wage”, I’ll ask a question in those trms. What determines a “fair wage”? The marketplace or some set of needs and wants of the worker?
I do think that collective bargaining can be part of a marketplace. Forcing people to join in the collective and limiting the available labor supply is a cartel and is the same as businesses getting together and agreeing on what they will pay, both anti-market practices.
5 November 2009 @ 8:38 am
You have to tie fair wage to so many other factors, it is a black hole.
For instance, if suddenly we pay all grocery store clerks a certain fair wage minimum,
then certainly food prices will adjust.
Is it right to ask someone who makes half the clerk’s wages to buy their food at such a store?
Are you willing to move out of the house you live in because of the crazy low wages of the folks who built it? Well, if we ensure that we have all legal workers receiving “fair wages” building houses, your kids won’t be able to buy one. So how do we go about changing a system like this?
I think the market works best.
And Jordan, thanks for the comparison to businesses – you are right, price fixing and certain strike conditions are not all that dissimilar.
6 November 2009 @ 9:38 am
I have been thinking about this for awhile – the fair wage question.
We own a business in the construction industry. We have had workers at various times, of course. They get paid better than minimum wage, but not enough to start a family. They get no health insurance. They don’t get much job security, since our work is seasonal.
When we talked about raising wages, the first and obvious question was “Will our prices be able to accomodate this increase?” and – in the construction industry the answer is routinely no. You are dealing with customers who are working six and seven day work weeks to make a little more than the next guy, while still beating out his contract price. Economy is king.
The only “fair” way to make these changes is when businesses have skilled positions which create the desire to retain workers, and that usually means perks and/or money.
But as long as there are unskilled positions (or skills with a short learning curves) there will not be pressure on wages to increase. At least from where I sit.
6 November 2009 @ 9:52 am
But kdeb, what you should do is pay the workers a “fair wage” and then, as Bill Clinton famously said, all you have to do is “pass those costs along to your customers.” Because, after all, there’s no such thing as price sensitivity in the market, and your customers have no choice but to come to you for service.